Case Law Details
Parthasarathy Venkates Babu Vs ITO (ITAT Bangalore)
Bengaluru ITAT: Section 54F Exemption Cannot Be Denied Merely for Non-Deposit in Capital Gains Account Scheme
The Bengaluru ITAT held that exemption under section 54F cannot be denied merely because the assessee failed to deposit the unutilised sale consideration in the Capital Gains Account Scheme (CGAS) before the due date under section 139(1), where the entire amount was ultimately invested in constructing a residential house within the statutory period. The assessee had sold a property for ₹1.28 crore, purchased a plot, and completed construction of a residential house within the prescribed three-year period. However, the Assessing Officer restricted the exemption on the ground that the unutilised amount had not been deposited in the CGAS before the due date for filing the return and consequently disallowed ₹24.08 lakh of the claim under section 54F.
The Tribunal observed that section 54F(4) is intended to apply where the assessee seeks to retain the unutilised capital gains beyond the due date while still claiming exemption. Where the assessee actually invests the capital gains in the purchase or construction of a residential house within the time permitted under section 54F(1), denial of exemption solely for non-deposit in the CGAS is not justified. Relying on the Karnataka High Court decisions in K. Ramachandra Rao and Narayan Ravi Prakash, the Tribunal held that the assessee was entitled to the full exemption and directed the Assessing Officer to allow the deduction under section 54F as claimed. The assessee’s appeal was accordingly allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal by Sri Parthasarathy Venkatesh Babu relates to assessment year 2015-16 and is directed against the appellate order dated 16 March 2026 passed by the National Faceless Appeal Centre, Delhi. By that order, the assessee’s appeal against the reassessment order dated 7 February 2023, passed under section 147 read with section 144B of the Income-tax Act, 1961, was dismissed. The assessee is therefore before us.
2. The Revenue received information that the assessee had sold immovable property for ₹1,28,15,000 but had not filed his return of income for assessment year 2015-16. Consequently, notice under section 148 of the Act was issued on 31 March 2022. In response, the assessee filed his return on 28 November 2022 and submitted replies during the assessment proceedings.
3. In return, the assessee declared sale consideration of ₹1,28,15,000 and claimed indexed cost of acquisition of ₹92,07,958, resulting in long-term capital gain of ₹36,07,042. He claimed exemption of ₹34,70,506 under section 54F of the Act and offered net long-term capital gain of ₹1,36,536. To support the claim, he stated that he had purchased a plot for ₹32,01,777 on 15 December 2014 and constructed a house on it, incurring construction expenditure of ₹91,00,028. The house was inaugurated on 14 September 2016, and bills and vouchers for construction were furnished.
4. The assessee submitted construction vouchers and bills aggregating to ₹22,09,131. Of this amount, ₹5,71,685 related to the period from 30 March 2015 to 31 August 2015, i.e., before the due date for filing the return under section 139(1). The remaining vouchers and bills, amounting to ₹16,37,446, related to the period from 8 October 2015 to 29 December 2016.
5. On examination, the learned Assessing Officer held that, to claim exemption under section 54F, the assessee was required to construct a new residential house within three years from the date of transfer of the immovable property. The Assessing Officer further held that any unutilized sale consideration as on the due date for filing the return under section 139(1) was required to be deposited in the Capital Gains Account Scheme with a scheduled bank or notified institution, in accordance with the rules prescribed by the Central Government. Based on the details furnished, the Assessing Officer noted that the assessee had invested ₹37,73,455, comprising the plot cost of ₹32,01,770 and construction expenditure of ₹5,71,685, before the due date under section 139(1). Since the unutilized sale consideration was not deposited in the notified Capital Gains Account Scheme under section 54F (4), the Assessing Officer restricted the exemption under section 54F to the investment of ₹37,73,455. The exemption was accordingly computed at ₹10,62,116 [₹37,73,455 × (₹36,07,042 / ₹1,28,15,000)], and the balance claim of ₹24,08,390 [₹34,70,506 – ₹10,62,116] was proposed to be disallowed.
6. Thus, only the investment of ₹37,73,455 made up to 31 August 2015 towards construction of the residential house qualified for exemption under section 54F. Exemption was therefore allowed to the extent of ₹10,62,116, and the balance claim of ₹24,08,390 was disallowed. Accordingly, the assessee’s total income was computed at ₹26,03,450 in the reassessment order dated 7 February 2023.
7. The assessee appealed before the learned CIT(A), who dismissed the appeal by order dated 16 March 2026. Before the first appellate authority, the assessee challenged the validity of the proceedings under section 148 of the Act, relying on decisions of the Hon’ble Telangana High Court and the Hon’ble Bombay High Court. The challenge was rejected on the grounds that third-party information showed that the assessee had sold the property and had not offered the resulting capital gain. The reassessment was therefore upheld as valid. On the claim under section 54F, disallowed to the extent of ₹24,08,390, the learned CIT(A) confirmed the action of the learned Assessing Officer, holding that section 54F provides a conditional exemption and that the assessee bears the burden of proving compliance with its conditions. The learned CIT(A) also held that, under sub-section (4), any part of the net consideration not utilized before the due date for filing the return under section 139(1) must be deposited in the Capital Gains Account Scheme. On this basis, the assessee’s claim was rejected.
8. Aggrieved, the assessee is in appeal before us. The learned authorized representative, Shri Narendra Sharma, challenged the appellate order, submitting that the reopening itself is invalid and that the disallowance under section 54F is unsustainable on merits. He contended that the merits of the issue are squarely covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in Fatima Bai v. ITO, 32 DTR 243. He further submitted that the reopening for assessment year 2015-16 was made by issuing notice under section 148 of the Act, an issue which, according to him, has been considered by Revenue before the Hon’ble Supreme Court. He therefore submitted that the reassessment is invalid.
9. The learned Departmental Representative strongly supported the orders of the lower authorities, both on merits and on the validity of the reopening of the assessment.
10. We have carefully considered the rival submissions and perused the orders of the lower authorities. The deduction under section 54F was denied solely by invoking sub-section (4), on the ground that the assessee had not deposited the unutilized amount in the Capital Gains Account Scheme before the due date for filing the return of income. However, sub-section (4) applies where the assessee seeks to retain the unutilized capital gains while still claiming exemption. If the assessee does not intend to retain the amount but instead invests it in the purchase or construction of a residential house within the period prescribed under section 54F (1), sub-section (4) is not attracted. Therefore, the contention that the assessee is disentitled to exemption merely because the amount was not deposited in the prescribed bank account, despite being invested in construction within the stipulated period, cannot be accepted.
11. We find that the issue on merits is squarely covered in favour of the assessee by the decisions of the Hon’ble Karnataka High Court in Narayan Ravi Prakash v. Income-tax Officer, National Faceless Assessment Centre, New Delhi [2024] 167 com192 (Karnataka) [06-08-2024] and CIT v. K. Ramachandra Rao [2015] 56 taxmann.com 163/230 Taxman 334 (Karnataka). On merits, therefore, we find no reason to sustain the action of the learned Assessing Officer or the learned CIT(A) in disallowing the deduction under section 54F of the Act merely because the assessee did not deposit the capital gain in the Capital Gains Account Scheme before the due date for filing the return of income. In view of the above, we reverse the orders of the lower authorities and direct the learned Assessing Officer to allow the deduction under section 54F of the Act as claimed by the assessee.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 29thJune, 2026.
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